Median home prices are likely to rise at an annual rate of 2.5% to 3.0% over the next five years, according to Prudential Real Estate Investors, Parsippany, N.J., which has developed a new model to predict housing prices.PREI said housing price appreciation is driven by three factors: income growth, interest rates, and the amount households are willing to spend on mortgage payments. "Some analysts have suggested that irrational exuberance has propelled the U.S. housing market and are predicting that the market is poised for a collapse in values," said Youguo Liang, managing director of research at PREI. "However, market drivers indicate that the market is structurally sound and should weather impending interest rate hikes without a catastrophe." The company said the national median home price has never fallen, and contends that even though rising interest rates could put downward pressure on prices, rising income should offset the effect of the rate increases. PREI is an investment management and advisory business of Prudential Financial Inc.

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